MBIA and bond insurer Ambac (NYSE: ABK) are in the process of re-capitalizing to store assets depleted as subprime mortgage and related asset defaults started to increase in 2007. The two companies need the capital in order to preserve optimal credit ratings -- ratings that are essential to both maintain existing business and to secure new business. Moreover, a lack of new capital would force ratings agencies to downgrade the bond insurers, which economists say would compel several banks to write-down certain assets, further restricting credit, with likely additional, negative consequences for the stock and bond markets.

MBIA's shares gained 12 cents to $12.30, while Ambac fell 15 cents to $9.69 in Thursday morning trading.

Sensing a potential credit market crisis that would affect New York state on a number of fronts, New York Governor Elliot Spitzer last week gave bond insurers three to five days to resolve their problems or face a government-imposed solution. Earlier, Spitzer provided Congressional testimony indicating the same, speaking on behalf of state insurance regulators.

Ackman, who has built up large short positions in MBIA, says he, not MBIA, is acting in the interest of policyholders and has accused MBIA's executives of bias, among other operational mistakes. Economist David H. Wang disagrees, calling Ackman's plan to split MBIA "like throwing gasoline as fire fighters attempt to put out a house fire."

"What's needed is re-capitalization of MBIA, which is occurring, and re-capitalization of Ambac, which I believe will occur in the near future, Wang said. "The sooner MBIA and Ambac are re-capitalized, the sooner the credit markets will begin to return to normalcy."

Bond insurer MBIA has said repeatedly that it has enough capital to handle claims. MBIA has raised more than $2.65 billion in the past two months to keep its AAA rating. Ambac is also said to be evaluating re-capitalization proposals, Wang said.

In addition, Wang said the auction-rate securities market and related bond market "are showing signs of stabilizing" and he cited the Port Authority of New York and Jersey's more-tame 8% interest set on $100 million in bonds issued this week as an indication of the above. Rates had surged to 20% on February 12.

"The bond market is just starting to take its first few baby steps toward recovery, so it behooves regulators and investors to continue on the re-capitalization path for MBIA and Ambac," Wang said. "For reasons of operational stability, and proper market function, it's the most prudent action, in my interpretation